Law in the cloud – where to bite the Apple?

Court proceedings are underway here in Australia between Epic Games Inc (Epic) and Apple Inc (Apple) are well worth watching. Epic, maker of popular ‘battle royale’ game Fortnite, alleges that the App Store user contract by which Apple makes Fortnite available for internet download contains terms and conditions that ‘misuse’ Apple’s market power.

True to the spirit of Fortnite, the proceedings have become a ‘battle royale’ themselves. It is a fight for rights ownership in the cloud, with lots of moving pieces, titanic players, and massive dollars at risk. And amongst all this sturm und drang, there are important lessons for international business about contractual clauses that attempt to confine the jurisdiction in which a dispute can be heard and decided to the courts of one country, and not others.

In this article, Alistair Bridges and Lochlan Worrell of Moulis Legal outline the state of play on the ‘where to sue’ aspects of the case. What are the lessons for multi-national corporations, and indeed for any company that engages in cross-border business, whether on the internet or not?

This is the battle…

You cannot just make an app, load it onto the App Store and let the profits roll in. And that is not because of your lack of technical aptitude (or because your secret app idea is actually not that good). It is because apps developed for use on Australian iOS devices are required to abide by the Apple Developed Program License Agreement and the Apple Store Review Guidelines, the collective effect of which we will call the App License.

The App License highly regulates participation in the App Store. Amongst a thesaurus of clauses, an app developer must:

  • only distribute its app through Apple’s Australian App Store; and
  • only use Apple’s in-app payment processing system for the sale of in-app content.

Allegedly, Epic updated Fortnite, which was already in the App Store, to allow in-app payments to be made through Epic’s own systems, rather than through the App Store. Apple responded to this audacity by removing Fortnite from the App Store. In doing so, Apple effectively prevented more than three million Australian gamers from updating the app and made it unavailable to new users.

…but where is the battlefield?

In November 2020, Epic commenced proceedings in the Federal Court of Australia, asserting that the terms of the App License that Apple had activated offended certain ‘restrictive trade practices’ provisions under Part IV of the Competition and Consumer Act 2001 (CCA). One of these was ‘misuse of market power’. A party who suffers loss as a result of a contravention of CCA Part IV may directly sue the party said to have engaged in the restrictive trade practice.[1]

In parallel to the Australian proceedings, Epic instituted similar proceedings in the United States District Court for the Northern District of California. Those proceedings alleged that the App License offended against certain provisions of US competition law. Australian competition law claims were not included in those proceedings Under the App License, the Northern District of California is expressly referred to as the exclusive jurisdiction for litigation thereunder:

Any litigation or other dispute resolution between [Epic] and Apple arising out of or relating to the [App License], the Apple Software, or [Epic’s] relationship with Apple will take place in the Northern District of California…

Flip decision – Californian jurisdiction recognised

Utilising the exclusive jurisdiction clause in the App License, Apple argued in the Federal Court that Epic’s suit in Australia should be stayed (in other words, not be proceeded with).

The judge at first instance agreed with Apple. His Honour noted that the usual rule is that Australian courts will give effect to an exclusive jurisdiction clause unless there are ‘strong reasons’ not to do so. Despite the significant public interest dimension of the substantive claims brought under CCA Part IV, which His Honour acknowledged, he found that the state of the law did not permit him to refuse the application for a stay. He admitted to being troubled by his conclusion.

His Honour ordered a temporary stay of three months, at the conclusion of which the proceeding was to be permanently stayed if Epic did not commence proceedings in the Northern District of California, alleging that the App License offended against the provisions of Australian competition law which Epic had tried to raise in the stayed proceedings. Being wary of the US legal system’s reticence to rule on matters raised under foreign legislation, his Honour did say that Epic could apply to have the stay lifted if the Californian court blocked adjudication of Epic’s Australian competition law claims.

Flop decision – Australian jurisdiction recognised

Epic appealed the decision of the primary judge to the Full Court of the Federal Court, with the Full Court handing down its decision on 9 July 2021. The Full Court ruled that the primary judge had fallen into error in several respects. Accordingly, the Full Court overturned the stay and gave Epic the green light to pursue Apple in Australia.

Significantly, the Full Court found that the primary judge was required to consider the public interest aspects of the substantive proceedings when determining whether there were ‘strong reasons’ against the granting of the stay. The Full Court said that the correct focus for considering the public interest is the particular proceedings for which the stay was sought.

Factors supporting assumption of jurisdiction

The following observations of the Full Court about the public interest justification for assuming jurisdiction were pertinent to Epic’s claims, and can be expected to be pertinent to ‘restrictive trade practices’ proceedings generally:

  • whether the alleged contravening conduct could adversely affect the state of competition in markets in Australia and a very large number of Australians;
  • even if the proceedings relate to ‘global markets’ and are not ‘unique’ to Australian markets, will the proceedings nonetheless impact Australian consumers and involve the application of Australian substantive law;
  • because CCA Part IV claims focus on the protection of competition, which drives efficiency, and are therefore potentially beneficial to Australian consumers, they will usually have a public dimension ‘by their nature’;
  • the fact the Federal Court has been chosen by the legislature as the court of choice for these kinds of proceedings, and the existence of ACCC powers to intervene in civil proceedings, give strong reasons for overruling a foreign jurisdiction clause.

These observations would seem to point towards an assumption of jurisdiction by the Federal Court in most restrictive trade practices cases. However, the Full Court disavowed this notion, saying that not every CCA Part IV claim would necessarily have a public dimension. Some may be more in the nature of commercial disputes between parties. Ultimately, the strength of the public interest criteria will depend on the nature of the proceedings themselves.

Non-exclusive exclusivity

A court in a particular jurisdiction that is approached by a party who wishes to sue its contractual partner, for its own compensation or gain, where the party has agreed under the same contract only to sue in a different jurisdiction, is likely to deny the suit. The sanctity of the parties’ own agreement will be the important policy touchstone.

The Epic v Apple stoush reminds us of the public interest dimension of competition claims. CCA Part IV is a major instrument of public policy. The Federal Court has clearly signalled its intention to retain the responsibility of interpreting Australian competition law in at least the more ‘systemic’ cases and believes this is what the legislature wants it to do.

This is not the endgame for exclusive jurisdiction clauses. However, the Federal Court has degraded their exclusivity in the arena of competition claims. In-house counsel should not discount the ability to sue in their own jurisdiction, contrary to a foreign exclusive jurisdiction clause. Depending on the circumstances, such a clause may not bar a party from seeking damages in Australia for perceived anti-competitive behaviour.

The content and application of competition law differs significantly from jurisdiction to jurisdiction. Epic obviously sees advantages in adopting Australia as its battleground for its complaint against Apple. Perhaps it has to do with the fact that the second element of the ‘misuse of market power’ offence is no longer limited to the intentional purpose of substantially lessening competition, but now extends to circumstances where the conduct merely has that effect, or likely effect. Australian competition law also allows attribution of the intent and actions of directors, employees and agents to the bodies corporate for whom they act, and gives broad discretion to courts in deciding the orders to be made if the offence is proven.

Appeal of Apple

Like the virtual fantasy battles that are at stake, the fight is not over. Apple has indicated its intention to appeal the Full Court decision and will need to seek leave from the High Court to do so. The battle royale continues.

This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.

© Moulis Legal 2021

 

[1] The Australian Competition and Consumer Commission (“ACCC”) can itself enforce compliance with CCA Part IV, and if successful the Court may impose significant penalties.

Key contacts
Alistair Bridges
Senior Associate and Head of Regulatory
Lochlan Worrell
Lawyer
M.